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Kafaala sponsorship system: Is it time to find alternatives?

Several GCC countries have already started to change their local sponsorship system, whether it was internally or externally driven

Dr. Mohamed A. Ramady

Published: Updated:

The substitution of Gulf nationals for expatriates through government’s so-called localization programs may provide partial relief, but in the long term the whole basis of localization as an employment generation tool has to be reassessed and an alternative sponsorship system has to be found as actual national employment in the Gulf private sector has been completely out of line with government-planned projections.

The matter is serious if the process of integrating foreign labor to local economic needs is mishandled. These might include reduced efficiency, lower productivity, higher costs and economic slowdown should localization be unwillingly enforced.

The model has to be more of a “partnership,” whereby both foreign labor and the Gulf community benefit in terms of profitability, skill transfer, productivity and product innovation. This spirit needs to be nourished, if a successful and willing handover of responsibilities and technical skills to Gulf labor is to occur as part of the localization process.

Several GCC countries have already started to change their local sponsorship or “kafaala” system, whether it was internally or externally driven. The first was concerning Qatar when it was announced on 13 December 2016, that it was cancelling the sponsorship system for expatriate workers. The new expat law in Qatar is stated to protect the rights of both workers and employers, ensuring smooth functioning of private institutions and state’s business activities as well as creating a suitable working environment in the country.

Second, Bahrain has implemented a new labor law that will nullify the sponsorship system as of April 2017 and replacing it with government sponsorship, and enabling foreign workers free to move between jobs at wages set by market demand and supply forces. Under the new Bahrain labor law, foreign workers would be directly sponsored by the Labor Market Regulatory Authority (LMRA) and would be free to move jobs without the consent of their previous employer.

Bahrain would introduce a ceiling on expatriate workers allowed into the country, but henceforth market supply and demand forces would determine workers’ movements between jobs and wage levels. In Saudi Arabia, the Ministry of Labor and Social Development has denied abolishing the sponsorship system for foreign workers, according to the ministry’s official account on Twitter. The denial came in response to news circulating on social media recently which said that the kingdom is set to cancel the expatriate workers’ sponsorship system.

Security concern

The issue of security and who can enter and work in the Gulf states is a very valid one and this sometimes overrides any discussion in contemplating scrapping the kafaala system. The Bahrain model is one way whereby a government acts as the sponsor once it identifies both the annual target number and type of foreign workers needed, and sets up a system of vigorous worker screening overseas as to the qualifications and experience of workers before granting work visas.

Another option is to create “super” large private sector overseas workers’ recruitment companies but this could be open to abuse and black market visa manipulation. At the same time, local companies can submit to a centralized government labor database centre their specific foreign labour requirements and these are matched even before the workers arrive in the Gulf.

The difference from the current system is that foreign labor can now be released if they underperform, or their company is going through a downturn in business, or can leave to join other companies if they feel that they can obtain better employment opportunities based on their skills and productivity.

This will reduce pockets of unemployed expatriates in some ailing industries and companies, while companies who are expanding and are denied worker visas under current sponsorship regulations, will tap these “free” expatriate workers. To achieve such an equilibrium in foreign labor demand and supply, there has to be close cooperation and coordination between the government’s overall sponsorship mechanism and the private sector.

Foreign workers in the Gulf bring both positive and negative economic and social consequences. Expatriates contribute as both consumers and producers to the local economy

Dr. Mohamed Ramady

Foreign workers in the Gulf bring both positive and negative economic and social consequences. Expatriates contribute as both consumers and producers to the local economy. While expatriate workers – especially those who are single – have a high propensity to save, and thus to transfer funds outside in remittances, the expatriate population as a whole spend a considerable amount of money within the GCC. They are a major source of income to local-owned establishments, such as travel, supermarkets and hotels.

A drastic reduction in expatriate numbers will cause dislocation to some local businesses, unless increased national spending patterns provide compensation. A study prepared by the GCC Secretariat in Riyadh in 2003 called for encouraging expatriate workers in Saudi Arabia to bring their families in order to increase their spending within the country and to cut down overseas remittances.

Yet the 2017 Saudi budget announcement introduced monthly expatriate dependents fees, with a potential consequence of fewer foreign dependents and even higher expatriate remittance outflows, barring an introduction of expat income or remittance withholding tax.

Minimum wage

For countries in the Gulf though, the issue of introducing a minimum wage level is a quandary. Many local industries continue to benefit from low expatriate wage levels, which are not attractive enough to national labor. The issue of raising the local minimum wage has been debated as a tool to attract more local labor entrants to jobs that were previously rejected by nationals.

The 2017 Saudi budget has also introduced additional fees on local companies who meet or even exceed their Saudization hiring targets and these fees are budgeted to rise over the next four years. The aim is simple: chose between nationals or expatriate workers, whereby local companies would choose that labor that are deemed more productive, or more compliant, and foreign workers might be hired, albeit at fewer numbers and at a greater cost to local industries.

But real life is more complicated. For a start, if the minimum wage level is raised for all companies, then their competitiveness with each other is not affected by the same degree. A higher minimum wage can actually increase employment in some circumstances, by attracting someone to take a job that was previously “economically inactive” or not employed at all, as is the case for many semi-skilled jobs in Saudi Arabia.

Foreign workers were meant to fulfil their obligations, receive their payment and return to their homeland. Because the Gulf countries are intensely concerned to preserve their unique cultural identity, they have also stressed the social aspects of the immigrants’ presence.

This relationship sometimes puts a strain on the expatriate work force. Most of them are in a temporary situation. They feel like they are in a hotel; they can never entertain the illusion of being at home. This feeling of isolation is magnified by security threats faced by some Western communities, following domestic bombings and acts of terrorism. National groups stick together, even though, with some exceptions, they did not know each other before. Together they are a collection of solitudes.

And what of the expatriates who return after a “stint” of duty in the Gulf – ranging from the shortest possible contract of two years to several decades for many workers? They often face problems when they return to reclaim their place in the societies they left. They find that their friends and associates back home don’t understand or appreciate the things they have experienced. For those that do settle, their expanded experiences, the higher degree of responsibility they had assumed and the new technologies they learned, make expatriate labor more valuable to the home country.

For others that do not settle, there are a host of problems. They are forced to forget a whole area of their lives or to meet with other former expatriates, like veterans of campaigns. Some cannot make the adjustments and return overseas to become de facto career expatriates, moving from job to job around the world like nomads, maintaining contact with friends they have made along the way.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.